Mike Zdeb is a Partner in the Chicago office
In shareholder rights disputes that result in a judicial appraisal proceeding, the date of value is a critical topic. Business values can fluctuate during the course of attempting to resolve a dispute or during litigation. The values also can be impacted by the conduct of the parties.
Many statutes that address shareholder or member oppression cases already provide a presumptive date of value. Generally, this is the date the litigation commences. Some jurisdictions only specify a date if an election is made to proceed directly to an appraisal and buyout. Virtually all such statutes allow a court to have the equitable authority to designate a different date. This means that the court may find another date that is more fair given the facts of the matter at hand.
Why the Court Decided on a Different Market Value Date
The Wisnieski case presents an interesting example of a court deciding a different presumptive date of value, especially in light of litigation that continued almost 10 years. At the five-year mark, the case was back on a second trial, where the trial court was directed to consider varying the date. This variation occurred as a result of a need to conduct a hearing on the valuation as well as to consider how the "oppressing" brother remained active in the business during the pendency of the first trial and appeal. (In the first trial, the court had concluded a value based on expert reports but without an actual hearing. The court was directed to have a second trial hearing and evaluate the credibility and content of the reports.)
In the second trial, the parties addressed the issue of the date to be used. As expected, there were disagreements as to whether the oppressing brother's conduct in the interim was constructive or if he was an obstruction to operations and appreciation in market value. The sister painted her brother's conduct as disruptive. The brother, however, asserted his importance in operations and customer relationships up to the date he quit.
How a Shareholder's Conduct Influences the Valuation Date
The second trial court concluded that his participation in the company for those five years was not harmful to the business. As a result, the court set a more current valuation date that was five years after the litigation began — when the brother had ceased participation. The effect was to give the oppressing brother the benefit of the appreciation in value of the business during that five-year period.
The appellate court on the subsequent appeal — yes, the second appellate decision — agreed with the trial court. Changing the date of valuation from the presumptive date to a mark five years later was fair. This decision was supported by the finding that the brother had continued with some benefit and no harm to the company, even if his conduct had been oppressive to the sister.
Important Considerations When Assessing Shareholder Disputes and Litigation
As the Wisnieski case demonstrates, the date of value in any shareholder oppression dispute is significant and the impact of the conduct of the parties on the selection of the date is an important continuing consideration. Shareholder rights lawyers can give insight to disputing shareholders and members in regards to fair value considerations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
